Washington Post Foreign Service Friday, September 11, 1998

Frail Asian Economies Watch Hong Kong, Malaysian Ploys

By Keith B. Richburg
HONG KONG—Strange things are happening in Asia, a region that was once held up as an economic model but now is in the throes of one of the post-World War II world's deepest financial crises.

First in Hong Kong -- long praised as a bastion of free-market capitalism with a traditionally hands-off government -- the new Chinese administration has pumped billions of public dollars into the local stock market in a bid, it says, to scare off speculators who were driving stocks too low.

The government's unprecedented stock-buying spree has produced cries of outrage, with one local economist saying chief executive Tung Chee-hwa has turned the Hong Kong administration into "a kind of ATM machine for speculators."

Then last week in Malaysia, the government of Prime Minister Mahathir Mohamad announced it was essentially taking the country out of the global financial system, making its currency, the ringgit, nonconvertible overseas and taking other measures to isolate Malaysia's economy.

"The free-market system has failed," Mahathir said in a television address. "The only way we can manage the economy," he said, "is to insulate us from the activities of currency traders and share-market speculators." And he found a precedent in his decision to try to buck the market -- Hong Kong's costly intervention to prop up stock prices.

So what ever happened to all that talk about the new global financial marketplace?

"I think the intervention we saw in Hong Kong is going to become the rule, not the exception," said a longtime economic strategist in Hong Kong, who asked not to be named. With the world possibly entering a new era of deflation, he said, "governments will try to do what they can to prevent it [and] try to slow down the movement of capital."

"What you saw in Hong Kong was the tip of the iceberg," he said.

Several economists and fund managers said they fear other Asian governments may be tempted to follow Hong Kong and Malaysia, particularly as, 14 months after the region's economic collapse began, there are still no signs of recovery and the tight-money prescriptions of the International Monetary Fund have failed to stem the crisis.

Moreover, the countries most insulated from the crisis are those whose economies are the most closed and protected -- such as those of Communist-run China and Vietnam, which exercise controls on their currencies and are shielded from speculators that prey on open markets.

The main question now -- particularly for other countries in the region that might be contemplating following the same course -- is simply: Can it work? Can a country intervene in a stock market to beat back the global hedge funds and market speculators, as Hong Kong has tried to do? And can a country withdraw from the international economy, as did Malaysia?

In Hong Kong, the verdict is still out, but the government has spent at least $10 billion of its foreign exchange reserves on the effort -- and the stock market is resting fairly close to where it was before the intervention began Aug. 14.

If the goal was to beat back speculators and make them lose money, as stated by Hong Kong's financial secretary, Donald Tsang, it is unclear whether that worked -- or how long the government is prepared to spend its reserves against the unlimited capital of the hedge funds.

What is clear is that the intervention has cost Hong Kong its reputation, established during 150 years of British colonial rule, for limited government interference in the market economy. The government has defended the intervention, saying it was done not to prop up the stock market, but to defend against what officials here call the "double play."

Hong Kong has a fixed exchange rate, pegged at 7.8 Hong Kong dollars to the U.S. dollar. But to defend that peg against periodic attacks by outside speculators, the government has to jack up interest rates, and that in turn drives the stock market down. Speculators can thus work the "double play" by putting pressure on the Hong Kong dollar, and then selling short on the market, which means betting that the stock market will fall. So they make money whether the currency peg collapses, which is unlikely, or the market falls.

In one published reaction to the intervention, titled "The Undoing of Hong Kong," Yeung Wai Hong, the publisher of Next magazine, said, "The Hong Kong government dealt the territory's free-market system a crippling blow." He said the intervention would fail because "this betrayal has provoked a loss of confidence in the government's commitment to a free economy."

Some market analysts suggested the intervention may have been prompted by pressure on Tung, a former shipping tycoon before he became chief executive, from the territory's billionaire property barons who were watching their fortunes fall as the stock market plummeted.

"The inside track that I've heard is that it was Tung's decision, made with the advice and pressure of the business interests, especially the property tycoons," one hedge fund manager said.

Others have similarly criticized Mahathir's actions in Malaysia -- saying that the goal of his move to isolate that country's economy is not, as he said in his speech, to protect hard-working Malaysians who have seen their wealth deteriorate. Rather, some suspect, the government is more concerned about propping up failing Malaysian companies, many with connections to Mahathir's ruling United Malays National Organization.

Anwar Ibrahim, the deputy prime minister and finance minister who was unceremoniously fired by Mahathir last week, had tried earlier this year to institute an austerity policy that essentially would have allowed bad companies to go bankrupt without government bailout money.

Mahathir and his allies, such as the country's new economics czar, Daim Zainuddin, are seen as more sympathetic to ailing local companies and willing to take drastic measures -- such as walling off the country's economy -- to keep politically well-connected firms from going under.

"This is a return to the so-called Asian values, which is basically a cover for crony capitalism," said one local market analyst. "The ruling elite may get slightly richer in the short term, but their economies can't grow. . . . And the person who pays is the man in the street, because you get more inflation."

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